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Exercising a firm’s growth options: A portfolio approach

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  • Andrés, Pablo de
  • Fuente, Gabriel de la
  • Velasco, Pilar

Abstract

This paper investigates a firm’s decision to exercise its growth options within the current scope of business. We contend that the point at which a firm chooses whether or not to exercise such options depends on several strategic characteristics associated to its portfolio of businesses (i.e. level of diversification, average volatility of its current business, relatedness among them, and rivalry in its core business). Using a sample of U.S. companies from 1998 to 2013, we find evidence that a firm’s level of diversification and the volatility of its current business deter immediate growth option exercise. In contrast, relatedness and rivalry in its core business trigger growth options exercise. Our portfolio perspective differs from the bulk of the literature on real options, which evaluates each growth option exercise in isolation, and contributes to furthering knowledge on the drivers underlying a diversified firm's strategic investments.

Suggested Citation

  • Andrés, Pablo de & Fuente, Gabriel de la & Velasco, Pilar, 2021. "Exercising a firm’s growth options: A portfolio approach," Journal of Business Research, Elsevier, vol. 132(C), pages 571-585.
    • Handle: RePEc:eee:jbrese:v:132:y:2021:i:c:p:571-585
    DOI: 10.1016/j.jbusres.2021.04.074
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    More about this item

    Keywords

    Opportunity exploitation; Portfolio of businesses; Investment strategy; Options exercise; Real options;
    All these keywords.

    JEL classification:

    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities

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